Hospital Mergers Are A Major Health Cost Driver

There has been a great deal of discussion recently about repealing the federal law that exempts insurance companies from antitrust regulations, and the just-passed House reform bill would do just that. It is unlikely, however, that this will have much impact on insurance rates even if it is included in the final legislation. A more meaningful step would be to take a hard line on hospital mergers, which are known to drive up health costs. In fact, the Federal Trade Commission and the Department of Justice are revisiting their guidelines on horizontal mergers in the healthcare industry.

In a recent analysis of studies in the field, William B. Vogt, a senior economist at the Rand Corp., found that while hospital prices to private payers rose 20 percent between 1994 and 2001, those prices increased a whopping 42 percent between 2001 and 2008. Real per-capita spending on hospital care also jumped, rising from an average annual increase of 0.4 percent between 1993 and 2000 to average yearly increases of 3.8 percent between 2000 and 2007.

Vogt points out that the hospital price increases in this decade followed a period of unprecedented hospital consolidation that resulted in many cities being dominated by two or three large healthcare systems. This wave of mergers, which occurred in response to the cost-control efforts of managed care, as well as late '90s curbs on Medicare spending, led to healthcare systems winning big rate hikes from insurers and employers. In California, for example, the average prices that private payers paid to hospitals nearly doubled from 1999 to 2006.

Studies that compare hospital prices before and after mergers show that hospital consolidation typically results in price increases of 10 to 20 percent. "Price effects tend to be larger in studies using more recent data and when consolidating hospitals are located near one another," Vogt points out. While mergers may lead to economies of scale that reduce hospital costs modestly, those savings are generally not passed onto payers and consumers in the form of lower prices, he notes. And the evidence on the quality impact of consolidation, while mixed, suggests that the quality of care for Medicare patients actually drops after a hospital merger, Vogt says.

Considering that most population centers have more than one hospital system, and that rural areas are lucky if they have a hospital, it seems unlikely that the government will be able to apply antitrust law to stop many hospital mergers. Indeed, if past history is any guide, successful antitrust actions will continue to be rare in this field. Yet any serious effort to contain our runaway spending growth must reckon with the effect of dominant healthcare systems on insurance costs.